SPACs are drawing the attention of renowned underwriters like Goldman Sachs, Deutsche Bank and Credit Suisse. Not only retired senior executives are getting involved, but also high-profile celebrities, from entertainers to athletes. Serena Williams, Shaquille O’Neal and Stephen Curry are among the famous people who have participated in SPACs. This is the reason for the issuance of an “Investment Alert” by the U.S. Securities and Exchange Commission (SEC), warning investors not to make decisions solely based on celebrity involvement.
The following explains who the main SPAC stakeholders are and how a SPAC works.
- Sponsors – A SPAC starts with the formation of a management team, a group of experts of a specific industry or business sector. The members of the group are called sponsors. The operation’s success is entirely dependent on the composition of the management team. Therefore, sponsors will need to use all their expertise, knowledge, and experience to select the best company to merge with. To cover operating expenses, the sponsors invest risk capital towards non-refundable payments such as lawyers and accountants. Sponsors typically receive 20% of the SPAC’s common equity. If they successfully complete the whole operation of attracting investors, identifying a target, and closing a business combination, their venture capital and time investment will be rewarded.
- Investors – The unit structure is composed of a share and a fraction of a warrant, typically at $10 per unit. The majority of investments are from institutional investors or hedge funds. As mentioned in the previous article, SPAC investors are purchasing shares blindly as they don’t know what company they will end up investing in. After selling the units through a SPAC IPO, the cash raised from the investors is put into an escrow account. The appeal to invest in a SPAC can be found in the risk-free opportunity for the shareholders: once the agreement with the target company is announced, they have the option of continuing with the transaction or withdrawing, thus receiving their investment back with interest. Investors have a decisive role in the merger: if more than half (50 + 1) of the shareholders vote in favour of the deal and less than 20% vote in favour of liquidation, the business combination is approved, and the target company acquired becomes publicly listed.
- Target – A target is an existing private company identified by sponsors to form a business combination. Target identification is crucial as it needs to be approved by investors. Once the target has been pinpointed, the negotiations begin with the drafting of the agreement. The majority of SPAC targets are start-ups that have gone through the venture capital process. Companies have various options to go public, including the traditional IPO. But the faster route offered by SPACs may sound more appealing to them.
If a SPAC is successful, value will be created for each stakeholder: profit opportunities for the management team, risk-adjusted returns for investors and an attractive process to raise capital for target companies.